Tax credit for small-business hiring barely tapped

A $400-million program set up in 2009 to encourage California small businesses to take on new employees has disbursed only $39.7 million.

More than $360 million in small-business tax credits meant to spur hiring in California has been left on the table, raising concerns that the program wasn't working and that the appropriation will be grabbed back by the cash-strapped state.

The funds were set aside nearly two years ago as a way to reward small businesses for bringing on new workers. But by the end of 2010, less than 10% of the money had been claimed.

Tax officials were flummoxed by the low response, but small-business owners said the economy had been so poor that few were able to hire, even with the $3,000 that the credit would have provided. Others said they were unaware of the credit.

Given the current climate of economic uncertainty, said Michael Shaw, California legislative director for the National Federation of Independent Businesses, a one-time tax break was not going to be enough to prompt businesses to take on the responsibilities of new employees.

The tax break "made the difference for some folks who were ready to hire to make that final decision," Shaw said, "but it's not going to help someone who's struggling to keep their doors open to hire someone to get that credit."

Only very small businesses — those with 20 or fewer employees — could qualify for the credit that went into effect in 2009. By late December, these businesses had reported making 5,203 such hires.

They received $39.7 million in tax credits, out of the $400 million in the program.

State officials were surprised at the poor response to the hiring credit, said Denise Azimi, spokeswoman for the Franchise Tax Board.

"We had projected that the money would be gone by last June," Azimi said.

But Susan Woodward, a Bay Area economist who has studied small business hiring for the payroll firm Intuit, said that tax credits historically have not been particularly successful in spurring job creation.

"If they had read the history of similar tax credits on a national level they shouldn't have been so shocked," Woodward said, "because the effect of tax credits like this was not all that big and didn't seem to stimulate employment all that much."

By law, the tax credit is supposed to remain available until it is drawn down completely, no matter how long that takes.

But some small-business owners believe the state may try to use the appropriation for something else.

Under the administration of former Gov. Arnold Schwarzenegger, tax credits of all types were scheduled to be reconsidered this year, Schwarzenegger spokesman H.D. Palmer said.

A representative for newly elected Gov. Jerry Brown said that his administration had not yet considered what to do with the fund.

Some legislators have already said that the money should be diverted.

Assemblyman Anthony Portantino (D-La Cañada Flintridge) has introduced a measure that would at least keep the tax credits for small businesses. He proposed that $200 million of the remaining pot be used to help businesses pay for workers' compensation insurance.

The money would still be distributed in the form of tax credits. Owners of small businesses — still defined as those with 20 or fewer employees — could use it to offset a portion of the cost of their workers' comp premiums.

Portantino's proposal has not yet been scheduled for consideration in the Assembly.

Some small-business owners say that as the economy picks up the tax credit will be more attractive, perhaps pushing those who are on the fence about hiring to make their moves.

Jeanine Cotter, chief executive of Luminalt Energy Solutions in San Francisco, urged lawmakers not to tamper with the fund — even if it takes small businesses a few years to draw the money down.

"I would be very disappointed if money that was earmarked to generate employment and stimulate hiring were redeployed for something less identified with creating jobs," she said.